ITEM 1. LEGAL PROCEEDINGS




LITIGATION



On October 28, 1998, Mr. Ford Oxaal (d/b/a Minds-Eye-View, Inc.) filed a lawsuit
against us in the United States District Court for the Northern District of New
York. The plaintiffs, Mr. Oxaal and Minds-Eye-View, alleged that we breached a
duty of confidence to them, made misrepresentations and misappropriated trade
secrets. The court removed this action to arbitration upon our motion, and we
cross-claimed alleging various affirmative claims against Mr. Oxaal, including
trade secret theft. The plaintiffs filed a motion to dismiss the suit, and the
court dismissed the lawsuit on May 19, 1999. Although the lawsuit was dismissed,
we are continuing to prosecute our affirmative claims against Mr. Oxaal. The
arbitration has been stayed pending resolution of the following lawsuit. On May
20, 1999, Mr. Oxaal filed a lawsuit against us, Kodak, Nikon and Cendant in the
same court alleging that our technology infringes patent number 5,903,782. On
December 5, 2000, Mr. Oxaal filed a lawsuit against us in the same court
alleging that our technology infringes patent number 6,157,385. In both cases,
the plaintiffs are seeking an unspecified amount of damages, interest, an
accounting by us, costs and attorney's fees, in addition to a permanent
injunction prohibiting the alleged infringement. In the first case, the
plaintiffs claim that the alleged infringement is deliberate and willful and is
seeking treble damages. In both cases we have asserted defenses and
counterclaims that we did not infringe any valid claims of the patents, that the
patents are invalid, and that the patents are unenforceable. We believe that Mr.
Oxaal's claims are without merit and we intend to vigorously defend against his
claims. If Mr. Oxaal were to prevail in either lawsuit, however, our financial
condition, results of operations and cash flows could be materially adversely
affected. We are not currently a party to any other legal proceedings the
adverse outcome of which, individually or in the aggregate, we believe could
have a material adverse effect on our business, financial condition or results
of operations.


We filed suit against Infinite Pictures, Inc. (now iMove) of Portland, Oregon in
October of 1996. We claimed that Infinite Pictures' SmoothMove and RealWorld
Navigation Design Series products infringed our U.S. Patent No. 5,185,667. In
April 1999, the jury found for the plaintiff, Internet Pictures, unanimously on
all counts of the verdict and awarded damages of one million dollars
($1,000,000) to Internet Pictures. The court



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entered a final judgment and a permanent injunction against Infinite Pictures to
prevent further marketing of products based on the infringing technology
following the jury's verdict. In September 2000, the court denied Infinite
Pictures' motions for a new trial and validated the jury's verdict for us.


-        The court confirmed IPIX's exclusive patent rights within the
United States covering the transformation of fisheye
photographic images into perspective corrected images that
forms the core technology behind dynamic 360(Degree) navigable
images.


-        Judgment is entered in favor of plaintiff IPIX and against
defendant Infinite Pictures and defendant Bill Tillman of
Grafic Efx in the sum of $1,000,000 plus interest from August
1, 1996.


-        Infinite Pictures shall bear the cost incurred by IPIX in this
litigation.


A copy of the judgment can be found at


http://www.ipix.com/aboutus/press/092600a.html


Infinite Pictures filed an appeal brief during the first quarter of
2001 and posted a bond. Since then, Infinite Pictures has made overtures for
settlement, but negotiations have not begun in earnest.


We are not currently a party to any other legal proceedings the adverse
outcome of which, individually or in the aggregate, we believe could have a
material adverse effect on our business, financial condition or results of
operations.